Addicted to Rent - Summary"Addicted to Rent" starts from the important but often misunderstood concept of economic rent, or above normal profit. The report argues that in spite of the efforts of many, timber policy reform in Indonesia continues to fail because governments past and present view the timber resources as something from which they can informally capture economic rent, and use it for political and personal objectives, rather than to achieve national development objectives. The informal capture of timber rent is achieved through a three step process. (1) Timber concessions and plywood mills are discretionarily licensed to a narrow and politically-privileged group of companies. (2) Domestic log prices are kept low through the use of non-tariff barriers. (3) Rents arising from the enormous price spread between low Indonesian forest products prices and high world forest products prices are captured at the export gate exclusively by concession-plywood operations and their political patrons. There are two consequences of these policies. First, because rents continue to be siphoned off informally, official government timber revenues are low. Taking the current official log price of US$80/m3 for red meranti, the industry standard, the government should be capturing US$58/m3 in rent. However, timber fees and corporate income tax capture at the most US$35/m3, and probably far less because of transfer pricing. This means that for each cubic meter of red meranti harvested, US$23 in excess profit is being made by timber companies, and lost to the government. All this is happening against a background of Indonesia borrowing tens of billions of dollars to finance government expenditure. A second consequence of rent addiction is that, because the plywood industry, and to a lesser extent the moldings industry, are the only gates through which the exports of top value hardwoods may pass, and rents collected, Indonesian businesses scrambled to build plywood mills. As a result, the country now has far more mills than can be supplied by its forests. Assuming they are operating at full licensed capacity, the report proves that export-oriented plywood mills and sawmills can now obtain only 1/3 of the roundwood they need from their own timber concessions, with the remaining 2/3 being supplied by unsustainable (but legal) land clearing, and illegal logging. Comments and questions are also welcome at davidwbrown@attglobal.net
An Indonesian translation of the report can now be obtained from the DFID Multi-stakeholder Forestry Programme, Manggala Wanabakti Blok VII, Lt.6, Jl. Jend. Gatot Subroto, Jakarta 10270, Indonesia. Tel: (62-21) 572-0225. Fax: (62-21) 570-4401.
Sat Feb 19 2000
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